Exchange Rates and Bollinger Bands: Profiting on Indecision

There is more indecision and opinion in the Forex market than any other market.  Instead of trading the profitability of companies, investors are virtually buying and selling whole economies and theories on monetary policy. 

The Forex market is also the most decentralized, as it is controlled by a number of interbanks that act as market makers to set the price of currency around the world.

Forex moves are inherently more important  

For a stock market to drop 5% in one day is uncommon, but for a currency to drop 5% in one day is absolutely unimaginable. 

The moves in foreign currencies have a huge impact on global trade and the banking industry, as well as the thousands of corporations that conduct business in more than one country. 

Indecision runs amuck in the largest market by valuation, with an estimated $1.9 trillion trading hands each and every day.

Profiting on indecision 

Until the last few years, the Forex market was cornered by just a few of the largest international banks. 

Today the Forex market is open to all investors with as little as $1 worth of capital and an internet connection. 

As the Forex market grows to accommodate more investors, the amount of opinions and indecision in the movements of Forex prices grows as well.

Making it clear 

For the ordinary individual investor, fundamental analysis in the Forex market is virtually non-existent. Access to newswires and data sources can run hundreds, even thousands of dollars per month, wiping away much of the profitability of Forex trading for the individual. 

Today individuals in the Forex market are mostly technicians with a few longer term investors still holding on to the fundamentals, including inflation and economic factors, along with the changing geo-political tensions.

Bollinger Bands shine in Forex 

Bollinger Bands remain one of the most popular technical indicators in the Forex market because of its easy application to any timeframe long or short, as well as the accuracy of Bollinger Band ranges. 

Applying popular stock market indicators to the Forex market often does not work due to the sustained changes in volatility and price action throughout the day; in contrast, the stock markets generally carry the same amount of volume and action throughout the shorter eight hour per day session.

Indecision in Forex  

Indecision generally occurs at the relative top or bottom of a given chart and likely is a signal that a reversal or change in direction is coming quickly. 

Candlestick analysis places emphasis on the Doji or a candlestick that moved up and down within the period, but closed at the same value at which it opened.  On a chart these look like the lowercase “t.” 

 
As you can see above, the chart drops quickly to the bottom of the Bollinger Bands where two Dojis appear. Following the touch to the bottom Band and the formation of two Dojis, the market rebounds quickly.

The Dojis confirmed that the market was changing directions just after riding the bottom Band.

Putting indecision on your side 

Indecisive investors are losing investors.  Bollinger Bands truly help to smooth out the quick movements of the Forex market and help investors make sense of the underlying movements. 

Applying the Bands alongside a candlestick analysis regimen is a great way to bolster your account balance while other traders are left scratching their heads.